I don’t know if this is a great idea or a terrible idea, so I’ll just throw it out.

One of the problems with proprosed carbon cap-and-trade systems is the uncertainty of the real value of carbon credits. A carbon credit is where you buy, for example, solar panels for a factory in Bangalore to offset the carbon dioxide from your coal-fired power plant in Belgum. The overall goal is to reduce the greenhouse gasses entering the atmosphere, and it doesn’t matter where the reduction actually occurs.

There are a lot of moving parts to a carbon credit market, but the primary issue is this: we’re pulling ancient carbon out of the ground in the form of fossil fuels, then burning them to produce carbon dioxide. In a geological instant, we’re burning the remains which have collected over billions of years. We need to either stop burning ancient stuff, or start burying as much as we burn.

Unfortunately, we don’t have accounting rules that work in geological time. What a carbon market really needs to do is to guarantee that either a particular chunk of carbon is going to stay out of the atmosphere permanently. Or at least for the next fifty years.

What we have instead is a variety of dubious claims and half-claims based on expected results of the things that can be accounted for. So, for example, you can get carbon credits for planting trees, but there is no disencentive for burning existing old-growth rainforests. Thus you can get paid to burn down one forest and replace it with another. The system is full of these sorts of paradoxes.

There is one industry which is used to working on long time scales to manage risks and protect valuable resources. The insurance industry. So perhaps when a power company buys a carbon credit, it should also buy carbon insurance for that credit. If the credit turns out to be of questionable merit, or unforseen circumstances ruin its value (e.g. a forest fire), the insurance company buys another credit to replace the old one.

All of which brings up the question: what is renewable energy worth? If you replace a coal-fired power plant with solar or wind energy, there’s no guarantee that the coal won’t just get sold to someone else. In fact, supply-and-demand dictates that coal will just get cheaper until it’s no longer profitable to pull it out of the ground– with little or no impact on the actual amount of coal usage. (I have no idea whether that represents the actual dynamics of the coal industry, which is probably dominated by long-term contracts and razor-thin margins.)

I suspect that renewable energy is not as valuable as demand for renewable energy. If there’s money to be made, research and development gets done until you get to the point where renewables really are cheaper than fossil fuels. Which, if it works, makes them far more valuable than a carbon market.